Delivering the goods

The new policy allowing private operators to transport bulk cargo and robust industrial production numbers bode well for logistics players. While the dip in demand in European economies had led to a drop in trade, strong imports, a gradual increase in manufacturing activity and a low base are helping Indian ports record strong double-digit growth in container volumes.

The drop in exports and muted June quarter results have, however,resulted in flattish to negative movement in stock prices of leading listed logistics' players over the past month. Nomura, in a recent report, suggests the Street is unduly pessimistic on traffic recovery due to the European crisis, and expects 15-20 per cent growth in container traffic till November. For the current year, growth rates and volumes are likely to be better than last year.

VOLUME BOOST NEEDED

FY11 Estimates in Rs cr

Net sales

OPM (%)

Net profit

P/E (x)

Allcargo Global

2,671

10.80

184

12.40

Container Corporation

4,106

25.30

872

21.30

Gateway Distriparks

637

25.40

87

12.50

Transport Corporation

1,726

8.10

58

17.30

Source: Analyst reports

Strong container volumesFor the April-July period, while overall cargo volumes grew by just two per cent year-on-year to 184 million tonnes, container traffic jumped 14 per cent. Compared to June, when month-on-month volumes were down by about six per cent, overall cargo and container traffic in July registered growth of up to two per cent, month-on-month. Analysts say while container volumes are likely to increase, growth in cargo volumes will be dependent on petroleum products and iron ore demand, which fell on refinery maintenance and Chinese iron ore imports.

Policy boost, margin worriesWhile better volumes are a positive, the recent policy changes have thrown open the transport of bulk cargo for private operators on the Indian rail network. Nomura says the step will increase the opportunity size for players like the Container Corporation (Concor) by 10 times. Given that 16 players are fighting it out for the container pie, the expansion of the market to include bulk cargo would increase opportunity size and reduce competition. While container volume growth should be strong for most players, the increase in haulage charges by the railways could mean lower margins if the higher cost is not fully passed on to consumers. We look at the prospects of key listed players.

ConcorDespite an eight per cent increase in export-import growth, Concor recorded a one per cent growth in revenues, year-on-year, to Rs 916 crore. Revenue was down due to shorter transportation routes and lower ground rent. Net profit was down four per cent due to a fall in other income and higher depreciation. While analysts believe margins will come under pressure, the policy change is expected to benefit the company, given its infrastructure advantages. At Rs 1,407, the stock is trading at 16 times its 2011-12 earnings estimates. Buy on dips.

Gateway DistriparksHigher container freight station (CFS) volumes helped the company register four per cent growth in consolidated revenues. Realisations per TEU (twenty-foot equivalent unit) declined 10 per cent sequentially, due to increased discounts on intensifying competition. Enam expects Gateway Distriparks' performance to improve as operations at its CFS subsidiary, Punjab Conware, stabilises, and the Faridabad and Kochi facilities start contributing to volume growth in 2011-12. The stock is attractively priced at 10 times 2011-12 earnings estimates.

Allcargo GlobalThe company announced last week that it was planning to expand its freight handling capacity by upgrading its Mundra CFS facility, which will help to double export handling capacity to 4,000 TEUs per month. Its edge over other domestic competitors is its European subsidiary, ECU Line, giving it an opportunity to scale up its global operations. Margins, however, will depend on its ability to pass on the rise in freight rates. Analysts are positive on the stock, which is trading at 13 times its CY11 earnings estimates.

Transport CorporationStrong domestic demand helped the company post 25 per cent gain in revenue in the June quarter, to Rs 394 crore. The demand came from the manufacturing sector, especially automobiles, engineering and capital goods. While there was pressure on costs due to the increase in freight costs and due to diesel price rises, the company was able to pass it on to customers. At Rs 138, the stock is trading at 17 times its 2011-12 earnings estimates. Buy on dips.